What are the "Dogs of the Dow"?

The Dow Jones Industrial Average (DJIA) is an index of 30 of the most significant, mature and respected companies in the world. Investing in the index itself over the long term is a fairly sensible strategy. The "Dogs of the Dow" is a variation on this strategy developed in 1972 in an attempt to beat the overall index.

The strategy involves building a portfolio equally distributed among the 10 companies in the DJIA that have the highest dividend yield at the beginning of the year, then readjusting this portfolio on an annual basis to reflect any changes that have occurred to these 10 companies throughout the calendar year. By buying these companies, you are essentially buying the cheapest stocks in the DJIA - companies that are temporarily out of favor with the market but still remain great companies. Of course, the hope is that the true value of these bargain stocks will be realized, and you will be able to capture a tidy profit at the end of the year by selling them and buying the new "Dogs of the Dow". When you readjust your portfolio to include the new dogs, you are just buying the stocks that are currently out of favor with the market and waiting for them to go up.

From 1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging a return rate of 14.3% annually, whereas the Dow's averaged 11%. The returns between 1973 and 1996 were even more impressive: the Dogs returned 20.3% annually, while the Dow's averaged 15.8%. However, you should always remember the important caveat attached to almost any investment strategy: Past performance does not guarantee future results. So, although the Dogs have performed well in the past, there is no guarantee that this trend will continue.